Taxes 
In this chapter, the basic tax treatment of listed options will be outlined and sev­
eral tax strategies will be presented. The reader should be aware of the fact that tax 
laws change, and therefore should consult tax counsel before actually implementing 
any tax-oriented strategy. The interpretation of certain tax strategies by the Internal 
Revenue Service is subject to reclarification or change, as well. 
An option is a capital asset and any gains or losses are capital gains or losses. 
Differing tax consequences apply, depending on whether the option trade is a 
complete transaction by itself, or whether it becomes part of a stock transaction via 
exercise or assignment. Listed option transactions that are closed out in the options 
market or are allowed to expire worthless are capital transactions. The holding period 
for option transactions to qualify as long-term is always the same as for stocks ( cur­
rently, it's one year). Gains from option purchases could possibly be long-term gains if 
the holding period of the option exceeds the long-term capital gains holding period. 
Gains from the sale of options are short-term capital gains. In addition, the tax 
treatment of futures options and index options and other listed nonequity options 
may differ from that of equity options. We will review these points individually. 
HISTORY 
In the short life of listed option trading. there have been several major changes in the 
tax rules. When options were first listed in 1973, the tax laws treated the gains and 
losses from writing options as ordinary income. That is, the thinking was that only 
professionals or those people in the business actually wrote over-the-counter options, 
and thus their gains and losses represented their ordinary income, or means of mak­
ing a living. This rule presented some interesting strategies involving spreads, 
because the long side of the spread could be treated as long-term gain (if held for 
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